Taiwan - A Company May Exercise The Right Of Disgorgement If Directors Fail To Explain To The Shareholders’ Meeting.
Legal News & Analysis - Asia Pacific - Taiwan - Regulatory & Compliance
3 February 2021
The Supreme Court rendered the 109-Tai-Shang-273 Decision of October 8, 2020 (hereinafter, the “Decision”), holding that a company may exercise the right of disgorgement if directors fail to explain to the shareholders’ meeting and obtain its approval of the material content of an act done for themselves or on behalf of another person engaged within the scope of the company’s business, and In case of any damage to the company in consequence of such act, the company may seek compensation in accordance with Article 544 of the Civil Code.
According to the facts underlying this Decision, Appellant Company A asserted that Appellees B and C were previously the Appellant’s Chairman and Director. A resolution was adopted during the Appellant’s special shareholders’ meeting to have D, not a party to this lawsuit, subscribe to all the Appellees’ shareholding in the Appellant. However, the Appellees breached their obligation as good administrators and failed to faithfully execute their business operation of the company. As a result, B set up Company F in the name of E to assume the orders from the Appellant’s major subcontractors before C illegally convened a shareholders’ meeting (hereinafter, the “Shareholders’ Meeting at Issue”) to adopt a resolution (hereinafter, the “Resolution at Issue”) to lay off all the employees and close down the company on the ground that the processing vendors which could work with the company could not continue to accept orders. Such resolution was revoked by a final court decision. As a result, Appellant Company A had to assume the cost of resuming its business operation and thus claimed that Appellees B and C should jointly and severally pay NT$1 million in accordance with Article 184, Article 185, Paragraph 1, and Article 544 of the Civil Code and Article 23, Paragraph 1 of the Company Law. Appellees B and C contended that Director G of the Appellant had objected to the transfer of the Appellant’s orders to be fulfilled by Ironwork X, not a party to this lawsuit. As a result, Ironwork X terminated the outsourcing relationship with the Appellant. Since no other outsourced vendor was located, Appellees C was afraid that it might be penalized for breach of contract for shipment delay and could not accept further orders. In addition, to avoid losses from continued payment of wages to the employees every month, Appellees C then convened the Shareholders’ Meeting at Issue to adopt the Resolution at Issue. It was not until Appellees B’s departure that Company F was set up in the name of E and Appellees B began to contact customers for orders on its own. Appellees B did not divert orders placed with the Appellant to Company F. Therefore, the Appellees neither breached their duty as good administrators nor caused any damage to the Appellant.
According to this Decision, Article 209, Paragraph 1 of the Company Law provides that when engaging in an act within the scope of the company’s business for themselves or for others, the directors should disclose the material content of their act to the shareholders’ meeting and obtain its approval. In addition, Paragraph 5 provides that if the directors engage in any such act for themselves or others in violation of Article 209, Paragraph 1 of the Company Law, the shareholders’ meeting may adopt a resolution to treat the income generated from such act as the income of the company. However, this does not apply where the income has been generated for over a year. Therefore, if directors fail to explain to the shareholders’ meeting and obtain its approval of the material content of the act engaged within the scope of the company’s business for themselves or for others, the company may exercise the disgorgement right in accordance with Article 209, Paragraph 5 of the Company Law, and this is not preconditioned by the fact that the company is damaged as a result of such act. If the company is damaged as a result, the company may seek compensation in accordance with Article 544 of the Civil Code.
It was further pointed out in this Decision that during his tenure as a director of the Appellant, Appellee B did not explain to the shareholders’ meeting and obtain its approval of his establishment of Company F, which has the same scope of business as that of Appellant Company A, in the name of E and his request to the Japanese customers of Appellant Company A to divert their orders to Company F. In that case, this would call into question whether Appellee B had faithfully executed his business or performed his duty of care as a good administrator, and whether Appellant A could not claim damages from Appellee B in accordance with Article 544 of the Civil Code. Failing to explore this, the original trial court was erroneous when it jumped to the conclusion that Appellant Company A could only exercise the disgorgement right in accordance with Article 209, Paragraph 5 of the Company Law for Appellee B’s violation of Paragraph 1 of the same law but could not claim damages from B in accordance with Article 544 of the Civil Code.
For further information, please contact:
Angela Wu, Lee Tsai & Partners